Joe Biden has made six proposals for student loan forgiveness that will collectively forgive about one-third of the $1.7 trillion in outstanding student loan debt. He has also proposed to provide free tuition at public colleges and universities.
Six Types of Student Loan Forgiveness
Joe Biden’s student loan forgiveness proposals include:
- Forgive up to $10,000 in per borrower
- Forgive tuition-related student loan debt
- Reform public service loan forgiveness
- New income-driven repayment plan
- Restore bankruptcy discharge of student loans
- Restore Defense to Repayment
Forgive $10,000 per Borrower
Joe Biden has said that he supports the Heroes Act, which will forgive up to $10,000 in student loan debt per borrower. The Heroes Act passed the U.S. House of Representatives on May 15, 2020, but is stalled in the U.S. Senate.
The original version of the legislation proposed to forgive up to $10,000 in federal student loans and up to $10,000 in private student loans per borrower.
The version that passed the House limited the loan forgiveness to economically-distressed borrowers.
Economically-distressed borrowers include borrowers whose adjusted gross income is less than 150% of the poverty line, borrowers in default, borrowers in a serious delinquency of 90 or more days, and borrowers who are in a deferment or forbearance due to financial reasons. About 40% of borrowers are considered economically-distressed under this definition.
Forgiving up to $10,000 per borrower will cost about $377 billion. If limited to just the economically-distressed borrowers, the cost would decrease to about $160 billion.
If the loan forgiveness were limited to just borrowers who owe $10,000 or less, the cost would be about $75 billion and about a third of student loan borrowers would have their debt completely forgiven.
Forgive Tuition-Related Student Loan Debt
Joe Biden has said that he will forgive tuition-related undergraduate federal student loan debt for students who graduated from public colleges, HBCUs or MSIs and who earn less than $125,000 per year.
Graduate student loans and private student loans are not eligible. Student loan debt from attending a private college is ineligible.
Forgiving tuition-related student loan debt will cost about $500 billion. There is significant overlap with the proposal to forgive up to $10,000 in student loans per borrower, reducing the combined cost.
Reform Public Service Loan Forgiveness
Currently, Public Service Loan Forgiveness is a back-end loan forgiveness program. The remaining debt is forgiven after the borrower makes 120 qualifying payments on their Federal Direct Loans while working full time in a public service job or combination of public service jobs.
Only 3% of applicants for loan forgiveness have had their loans forgiven under Public Service Loan Forgiveness (PSLF) or Temporary Expanded Public Service Loan Forgiveness (TEPSLF).
Joe Biden proposes to change Public Service Loan Forgiveness into an up-front loan forgiveness program, with up to $10,000 in student loan forgiveness per year for up to five years for borrowers working full-time in a qualifying public service job.
This proposal will effectively cap the amount of loan forgiveness at $50,000 per borrower, thereby eliminating the potential for moral hazard. (Moral hazard occurs when a student borrows more than they otherwise would because they know that the excess student loan debt will eventually be forgiven.)
New Income-Driven Repayment Plan
Joe Biden has proposed a new income-driven repayment plan that cuts the monthly payment to 5% of discretionary income, which is defined as the amount by which adjusted gross income exceeds $25,000. Borrowers will not have to make any payments on their federal student loans and interest will not accrue if their income is below $25,000.
The remaining debt will be forgiven after 20 years of payments. This loan forgiveness is tax-free, unlike the current income-driven repayment plans.
The cost of this proposal is minimal because many borrowers may already qualify for forgiveness of their tax debt because they are insolvent, with their total debt exceeding their assets. If borrowers aren’t already eligible for tax forgiveness, the cost of this proposal is less than $100 billion.
Restore Student Loan Bankruptcy Rights
Joe Biden has proposed to allow federal and private student loans to be discharged in bankruptcy.
Prior to 1976, borrowers could discharge their student loans without any limitations.
Today, borrowers must demonstrate in an adversarial proceeding that repaying their student loans would impose an undue hardship on the borrower and the borrower’s dependents. This is a very harsh standard, preventing most student loan borrowers from discharging their student loans in bankruptcy.
Joe Biden proposes to repeal 11 USC 523(a)(8), the section of the U.S. Bankruptcy Code that provides the exception to discharge for federal and private student loans.
The Consumer Bankruptcy Reform Act of 2020 and the Student Borrower Bankruptcy Relief Act of 2019 will repeal the exception to discharge.
The cost of bankruptcy discharge of student loans is about $20 billion in the first year, due to pent up demand, followed by less than $1 billion per year. This is one of the least expensive and most well-targeted proposals.
Restore the Borrower Defense to Repayment
The Borrower Defense to Repayment cancels the debt of borrowers whose colleges made misrepresentations concerning their student loans or education program.
The Trump Administration changed the Borrower Defense to Repayment rule and approved only 4% of all Borrower Defense to Repayment claims.
Joe Biden will restore the original Obama Administration rules and expeditiously review all pending claims, including those denied during the Trump Administration.
Joe Biden has two proposals to provide a free college education:
- Tuition-free community colleges. Joe Biden proposes to provide two years of free tuition at community colleges and other high-quality training programs for hard-working individuals. It will be available to part-time and full-time students, non-traditional older students and DREAMers. The federal government will cover 75% of the cost and the states the rest.
- Free tuition at public colleges and universities. Joe Biden proposes to provide up to four years of free tuition at public colleges and universities (and HBCUs and MSIs) for families with income below $125,000 per year.
Joe Biden also wants to double the maximum Federal Pell Grant. Doubling the Pell Grant will provide low-income students with money to cover other college costs, such as textbooks, transportation and room and board. The maximum Pell Grant will be indexed to the inflation rate. Pell Grants will also be available to DREAMers and formerly-incarcerated individuals.
Will Congress Cooperate?
Joe Biden cannot implement these proposals on his own. Congress will need to pass legislation to enact these proposals.
A lot depends on the Georgia runoff elections.
If Democrats win both Georgia Senate seats in the runoff election, there will be a 50/50 split of the Senate, with ties broken by Vice President Kamala Harris. Democrats will then be able to pass legislation with a simple majority.
However, a simple majority may not be enough to pass legislation. The Senate requires a 60-vote supermajority to cut off debate, so Republicans could block legislation through filibusters.
Nevertheless, there is a once-a-year opportunity to pass legislation without a filibuster, through a budget reconciliation bill. The Health Care and Education Reconciliation Act of 2010, otherwise known as the Affordable Care Act, was an example of a budget reconciliation bill.
Budget reconciliation bills must reduce the budget deficit, so any proposals for student loan forgiveness must be offset through savings elsewhere. Since opportunities for saving money are limited, this may force Joe Biden to scale back his legislative agenda.
Can Joe Biden Forgive Student Loans through an Executive Order?
Joe Biden cannot forgive hundreds of billions of dollars of federal student loans through an executive order.
The argument that the President (more specifically, the Secretary of Education) can forgive student loan debt is based on a misreading of the waiver authority specified in the Higher Education Act of 1965. It will not survive a court challenge.
The waiver authority appears at 20 USC 1082(a). But, people often take the authority out of context, ignoring the preamble which limits the waiver authority to operating within the confines of the statute: “the performance of, and with respect to, the functions, powers, and duties, vested in him by this part.”
In addition, the “this part” language limits it to part B, which is the Federal Family Education Loan (FFEL) program. There is similar language in part E of the Higher Education Act, for the Federal Perkins Loan, but there is no similar language for the Direct Loan program in part D.
The parallel terms clause at 20 USC 1087e(a)(1) does not apply to waiver authority, just to the terms and conditions of the student loans, especially considering that there is specific language mandating the charging of interest in the Direct Loan program, which overrides the parallel terms clause.
The Secretary of Education might be able to use regulatory authority to forgive student loans. While the process could start on Day 1, it will take several months to publish a final rule and implement forgiveness.
Using an executive order or regulations to implement loan forgiveness will forestall any possibility of cooperation and compromise between Democrats and Republicans.
Should You Refinance Your Student Loans?
If you refinance your student loans, you might miss out on the loan forgiveness, if it occurs.
Consider that the payment pause and interest waiver was available only to borrowers with federal loans held by the U.S. Department of Education. Commercially held federal loans and private student loans were not eligible.
So, there’s a risk that if you refinance your federal loans into private student loans, you’ll lose the opportunity for student loan forgiveness along with the other superior benefits of federal student loans, including income-driven repayment plans, generous deferment options, and more.
There’s also no rush to refinance. Interest rates are at or near record lows. The Federal Reserve Board has said that they intend to keep interest rates low throughout 2021 and 2022. So, interest rates on private student loans are unlikely to increase over the next few months or years.
On the other hand, there’s also a risk that loan forgiveness might not happen at all, so waiting to refinance might miss an opportunity to lock in a low rate now and save on interest sooner. Still, federal loans that are eligible for the payment pause and interest waiver effectively have a zero-interest rate, mitigating the risk of waiting.
Of course, nothing stops a borrower from refinancing a private student loan to take advantage of the new low interest rates. Borrowers should compare options from different lenders to make sure they get the best rate available.
Borrowers who refinance should refinance into a fixed-rate loan, since variable interest rates have nowhere to go but up.
If a borrower is willing and able to pay off their student loans in full within a few years, before interest rates rise too much, then a variable-rate private student loan may save some money.
Refinancing makes most sense for borrowers who have excellent credit and fixed-rate loans from several years ago, when interest rates were much higher.
Borrowers who are pursuing loan forgiveness or who are struggling to repay their loans should not refinance their student loans.